Tax Facts

Tax Facts contains news and alerts relating to tax practice, for the benefit of accountants and other professionals in public practice. Please click on the links below for recent issues. You may also like to peruse Tax Facts by topic category - topics are listed below to the right.

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  • Dividends from Family Court orders

    The Commissioner recently issued a final income tax ruling on the consequences of Family Court orders involving private companies. If an order results in a private company paying money or transferring property to a shareholder of the company, then that will constitute a dividend under ordinary principles. But the ruling represents a complete change of view where money is paid or property is transferred to an associate of a shareholder.

    The view taken in this ruling is that there will be a deemed dividend under Division 7A where money is paid or property transferred to an associate of a shareholder. In particular, the Commissioner no longer regards s109J as applying to prevent Division 7A's operation. However, unlike the general rule in relation to Division 7A dividends, one arising because of family law obligations may be frankable and the associate may be entitled to franking credits – even though not a shareholder (s109RC).

    Family law settlements involving private companies will now consequently be much more difficult and the tax effects, as well as ensuring conditions for franking credits to apply where appropriate, are important matters to include in negotiations.

    The Commissioner's changed stance about this matter is another reason why shares in all companies should be held by discretionary trusts (there is even good reason why shares in a corporate trustee should not be held by individuals beneficially). Shares held by trusts provide the greatest flexibility and safety – for instance, it might be necessary in more cases in future to pass accumulated, franked profits from an existing private company to a separate company to be controlled by one spouse/partner only. (Taxation Ruling TR 2014/5)

    Before Christmas, we will be releasing another new product that will make it very simple and convenient to register a new company with the shares held subject to a discretionary trust.
    ... Read More

    27 Aug 2014

    Topic: Income Tax

  • No bad debt deduction for trust distribution 'set aside'

    In a recent AAT case, a taxpayer was unsuccessful in his claim for a bad debt deduction for trust income ‘set aside’ for him but never received. He had become entitled to that trust income in the 2005 and 2007 years of income, but then determined in April 2012 that the outstanding balance was irrecoverable from the trustee.

    The bad debt claim was made under s25-35, which provides for a deduction for a debt or part of a debt written off if ‘it was included in your assessable income for the income year or for an earlier income year’. However, the Tribunal held that the debt written off ‘was of an entirely different character’ to the assessable income from the trust on which the taxpayer had previously been assessed. The reason was that the setting aside of trust income for a beneficiary in a separate account in the books of the trust discharged the trustee's obligation to pay or apply trust income for the purposes of the trust deed – the deed provided that income set aside in that way would constitute a loan payable at call to the beneficiary.

    The Commissioner has difficulties about bad debt deductions for unpaid trust entitlements in any case (see ATO ID 2013/15). But the AAT held that the drafting of the trust deed in this case meant that the taxpayer never even got to the main argument. So this case is a good example of why it actually does matter what is written in a trust deed. (Pope v FC of T [2014] AATA 532)
    ... Read More

    27 Aug 2014

    Topic: Income Tax/Trusts

  • Targeting of property development profits being treated as capital gains

    The Commissioner in Taxpayer Alert TA 2014/1 has warned of concerns about the proceeds from property development being treated under the CGT regime rather than as revenue matters. The Alert refers to cases where a separate, special purpose trust is set up by a developer or other person involved in the property or construction industry to acquire property for development and sale.

    Concerns include whether the property comprises trading stock and whether the proceeds from sale (or, alternatively, the net profit) constitute ordinary income. In the simple circumstances described in the Alert, I would expect that the Commissioner would have little difficulty succeeding in taxing the profits as ordinary income. The CGT regime prima facie also applies (since the income/capital dichotomy is irrelevant for CGT purposes), but the capital gain is typically then reduced under anti-overlap provisions in order to avoid double tax.
    ... Read More

    27 Aug 2014

    Topic: Income Tax/CGT